An International Monetary Fund (IMF) team from Washington, D.C., headed by
Mr. Jarkko Turunen, visited Phnom Penh and Sihanoukville from July 12 to
25, 2017, to conduct discussions on the annual Article IV review of the
Cambodian economy.
[1]
Mr. Markus Rodlauer, Deputy Director of the Asia Pacific Department of the
IMF, joined the final policy discussions.
At the conclusion of the visit, Mr. Turunen issued the following statement:
“Cambodia continues to grow at an impressive pace. Economic activity
remained strong in 2016, while inflation rose to 3 percent, driven by
higher food and energy prices. Growth is projected to remain robust at
around 7 percent in 2017–18, with moderating private investment offset by
higher public spending and robust construction and tourism activity. The
current account deficit narrowed to 8.8 percent of GDP in 2016. Supported
by the lower current account deficit and strong FDI inflows, foreign
reserves continued to grow, reaching US$7.9 billion in June 2017.
“Cambodia’s economic outlook is positive, although there are downside
risks. Our discussions focused on three areas: (i) managing macro-financial
risks, (ii) safeguarding fiscal sustainability, and (iii) accelerating
reforms to support growth, resilience and inclusion.
“Rapid credit growth over the past several years has led to a significant
increase in the bank credit-to-GDP ratio to close to 70 percent. To
mitigate financial stability risks, the National Bank of Cambodia has taken
several welcome macroprudential policy measures, including implementation
of the Liquidity Coverage Ratio and higher minimum capital requirements;
bank-specific prudential measures on institutions deemed to be taking
excessive risks; and liquidity-providing collateralized operations to
provide lower-cost riel funds. Partly as a result of these measures, credit
growth has moderated this year, although the credit-to-GDP ratio is still
increasing and a sizeable part of bank credit continues to be funded from
abroad.
“The authorities should continue to take measures to improve resilience and
address elevated financial sector vulnerabilities, such as better managing
credit risks, introducing targeted macroprudential policies, developing a
crisis management framework, and upgrading regulation of non-bank financial
institutions.
“Prudent fiscal management in recent years has kept fiscal deficits in
check and public debt low. Implementation of the government’s Revenue
Mobilization Strategy (RMS), coupled with robust growth, has seen tax
revenues increase significantly to over 15 percent of GDP in 2016. But this
year the fiscal deficit is projected to widen to about 3.7percent of GDP,
owing to higher public sector wages and other current spending. Looking
ahead, Cambodia will face rising spending pressures and, unless the RMS is
re-invigorated, revenue growth is expected to moderate.
“Therefore, additional measures are needed to safeguard fiscal
sustainability and achieve a growth- and development-friendly expenditure
mix. In particular, we see a need to contain near-term fiscal deficits,
strengthen tax administration and policies, prioritize productive
pro-development spending and ensure that public wage increases remain
sustainable and are accompanied by further progress in public
administration reforms. There is also room to improve the public-private
partnership framework to help manage fiscal costs and risks, while
addressing infrastructure bottlenecks.
“Cambodia has grown rapidly over the past few decades, supported by a
stable macroeconomic environment, an open and market-oriented economy, its
location in the world’s fastest-growing region, and its relatively young
population. Poverty has declined, although a significant share of the
population remains vulnerable. That said, Cambodia also faces structural
constraints, including a narrow economic base, weak business climate and
still underdeveloped financial markets. These constraints limit growth
potential and render the economy and financial system vulnerable to shocks.
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Structural reforms are needed to increase competitiveness and
encourage diversification through lower energy costs, better human
capital and infrastructure, and stronger rule of law and
transparency. Accelerated implementation of the Industrial
Development Policy would spur growth of small-and-medium-sized
enterprises and help Cambodia find a place in regional value
chains. Internalizing the impact of climate change on climate
sensitive sectors, including agriculture, and spillovers to other
sectors, in policy design would help improve resilience.
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Promoting further financial market development and reforms to
encourage local currency use would help increase resilience. The
authorities have taken welcome measures to promote local currency
use, including to require a minimum of 10 percent of the loan
portfolio to be in riel and calling for businesses to post prices
in riel. Further measures such as continuing to promote the
development of interbank, government bond, and foreign exchange
markets are needed to encourage riel use and allow for the eventual
implementation of an effective monetary policy framework.
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Use of financial technology, developing financial infrastructure
and improving financial literacy can help expand financial
inclusion. Financial inclusion has improved, including through
access to MFI credit and emerging use of mobile services. However,
large gaps remain. Continued efforts are needed to improve
financial literacy and reduce costs, expand products, and improve
consumer protection. A comprehensive financial inclusion strategy
would help address risks and safeguard financial stability while at
the same time fostering innovation and competition.
“Given the authorities’ strong commitment and determination, we are
confident that Cambodia will continue to build on its economic
achievements over the last few decades and successfully navigate
the challenges ahead.
“The team held constructive and candid discussions with senior officials of
the Royal Government of Cambodia, National Bank of Cambodia, and other
public agencies, as well as a wide range of stakeholders, including
representatives of the business and banking sectors, think tanks, and
development partners. We would like to express our sincere appreciation to
the Cambodian authorities for their hospitality and productive discussions
over the last two weeks.”
1
Under the Article IV consultation, IMF staff undertakes annual
surveillance and analysis of economic developments and policies of
member countries for discussion by the Executive Board. The last
Article IV consultation discussion with Cambodia took place in July
2016.